What changed
RBI has allowed banks with AD Category-I licence to extend loans to FPIs for margin payments to CCIL for government securities settlement. This follows amendments to FEMA (Borrowing and Lending) Regulations, 2018 via Notification No. FEMA 3(R)2/2021-RB dated May 24, 2021. The circular is effective from June 4, 2021.
What it means for you
Banks can now offer credit to FPIs specifically for margin requirements on G-sec trades cleared through CCIL, subject to their own credit risk frameworks. This eases liquidity constraints for FPIs and may boost foreign participation in government securities. Banks must ensure compliance with FEMA and internal risk policies while lending.
What you must do
- Review and update credit risk frameworks to include lending to FPIs for margin purposes.
- Ensure compliance with FEMA (Borrowing and Lending) Regulations, 2018 as amended.
- Set up internal processes for margin lending to FPIs against government securities transactions.
- Monitor CCIL margin requirements and align lending limits accordingly.
Who it affects
AD Category-I banks in India, Foreign Portfolio Investors (FPIs), Clearing Corporation of India Ltd. (CCIL), Authorised Persons under FEMA
Can banks lend to FPIs for any purpose under this circular?
No, lending is specifically allowed only for placing margins with CCIL for settlement of government securities transactions, including Treasury Bills and State Development Loans.
What regulations govern this lending?
The lending is governed by the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, as amended by Notification No. FEMA 3(R)2/2021-RB dated May 24, 2021.
When did this circular become effective?
The directions are applicable with immediate effect from June 4, 2021.